Capital markets still look healthy – and that’s good for commercial real estate

At a breakfast forum Wednesday at the Ritz-Carlton, it seemed like the good times might just keep rolling in the commercial real estate world.

Price increases for commercial real estate have slowed and deals appear to be slowing as well, but neither show signs of collapsing as they did following the peak of the market in 2007. And despite the frenzy of building in Charlotte and other cities throughout the U.S., supply isn’t exceeding demand for new space – with the possible exception of apartments, and even those are leasing well.

“We think it’s a really balanced market” in terms of capital available to fuel growth and demand for more space in most types of commercial real estate, said Mark Gibson, CEO of HFF. The real estate brokerage and finance firm opened a Charlotte office in 2014. They sponsored Wednesday’s forum.

“There’s so much going on,” Gibson said of Charlotte. “It’s remarkable.”

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▪ Big institutional investors such as pension funds are raising the percentage of their portfolios they invest in real estate. Sovereign wealth funds from other countries looking to the U.S. for stability. Rule changes will make real estate its own category on major stock indexes later this year. That means the sources of cash to fund deals are growing.

Many public pension funds have raised their real estate targets from about 5 percent of their portfolios five years ago to about 10 percent today.

“That is an interesting source of emerging capital for commercial real estate,” Gibson said. And foreign investment in U.S. commercial real estate totaled $93 billion in 2015, almost double the $48 billion previous peak in 2007.

▪ Commercial mortgage-backed securities are a less important source of financing for this boom than the previous one. If you’ve read a Michael Lewis book or watched “The Big Short,” you know CMBS are important but complicated securities based on mortgages. In 2007, there were $230 billion worth of CMBS issued. In 2009, there were $3 billion. That number rose to $101 billion last year, but CMBS remain a much smaller slice of the money funding the current real estate market. That’s partly because of regulatory changes in response to the 2008 real estate crash that have made them harder for banks to issue.

▪ In 2007, at the peak for the previous market cycle, there were $573 billion worth of commercial real estate transactions. Last year, there were $543 billion – still 7 percent off that peak. And in 2007, interest rates were at about 4.6 percent – about 2.5 times higher than they are now. So, while any Fed action to raise interest rates could chill the commercial real estate market, Gibson said that’s far from a given. The more important factor, he said, is the availability of capital looking to invest – and right now, there’s lots of that.